Credit Building > Does paying off debt build credit?

Does paying off debt build credit?

Wollit Team2 minute read · Updated 30th June 2024

Paying off debt can have a significant impact on your UK credit history, in ways both good and bad. Here is how it works.

If I pay off a debt will my credit score go up?

Over time, yes, paying off debt can improve your credit score. However, this depends on several factors:

Type of debt. Paying off secured debt, such as a mortgage or car loan, can have a more significant positive impact on your credit score than paying off unsecured debt, such as credit cards or personal loans.
Credit utilisation ratio. Your credit utilisation ratio is the amount of credit you're using compared to the total amount of credit available to you. Paying off debt can lower your credit utilisation ratio, which can improve your credit score.
Length of credit history. The longer you've had credit accounts in good standing, the better it is for your credit score. Paying off debt can shorten your credit history, which may have a slight negative impact on your score.
New credit applications. Applying for new credit after paying off debt can have a temporary negative impact on your credit score due to hard inquiries on your credit report.
If you have other credit accounts. If you don’t have other credit accounts, you are essentially stopping your history of debt repayments. This can gradually lower your credit score over time, as lenders don’t have any recent information on which to assess your creditworthiness.

As you can see, it’s hard to say what happens to your credit score immediately after paying off a specific debt. However, over time, expect this to have a positive impact.

How long does paid off debt stay on my credit report?

Most things on your credit report stay there for six years from the date when they were recorded.

This applies to paid off debt too. If you've paid off the debt, it will still be visible on your credit report for the full six years, but lenders may pay less attention to it as it ages.

How can I maintain my credit score after paying off debt?

After paying off debt, there are two things you should do to make sure your credit score is in good shape.

First, check your credit report to make sure the debt shows off correctly as paid. While it’s rare, sometimes a debt that’s paid off entirely can show as having a missed payment, which can lead to your credit score being incorrectly lowered. This can be easy to fix but you need to keep an eye for it. Reach out to the lender if you spot anything odd.

Second, and even more important, enter a new credit agreement so you can continue to show timely repayments on debt.

One of the ways you can do this is by downloading a specialised credit-building app like Wollit.

Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies. This directly builds your credit history, the main factor that matters for your credit score.

Eventually, the impact of a small negative factor like closing a credit account will fade away and you will be able to maintain and even improve your credit score using your new history of on-time payments.